Friday, November 10, 2017

Top 7 Technical Analysis Tools

Many analysts try to convey the impression that technical analysis is an esoteric practice not meant for investors at large. The more jargon one uses, the more it helps to obfuscate the uninitiated.

Contrary to its name, there is nothing 'technical' about technical analysis. So, what is it? 

A graphical representation of stock prices (or index level) over time leads to certain well-identified price patterns that reveal the underlying supply and demand for the stocks (or index).

But aren't graphs used in mathematics and physics and chemistry? In other words, graphs equals science equals technical, right? That is the mistake that many investors make (probably because they had a bad science teacher in school).

Observing and identifying price patterns as they are forming, and using a few tools/indicators that help to suggest likely changes in the patterns (i.e. the underlying supply and demand) is all that is involved in technical analysis.

May be that's a bit over-simplified. Understanding which combination of tools to use, and identifying which patterns are more reliable in helping to estimate future price changes require lots of practice and real-world experience.

In other words, technical analysis is quite simple but not easy. That should not deter an investor from learning the basics and applying the learning in actual trading and investing.

Fundamental analysis involves detailed study of Annual Reports, the economy, sectoral growth, competitive environment, management competence and integrity to identify which company stocks are investment-worthy.

Just because a stock is investment-worthy doesn't mean it has to be bought at the current price. This is where technical analysis can help. If the price pattern shows supply is exceeding demand, the stock's price may be getting ready for a fall.

If the supply and demand seems equally matched, the stock price may meander sideways for weeks or months. Only when demand exceeds supply can a stock's price start moving up.

A problem faced by many small investors - who have taken the brave step to venture into studying price patterns - is which technical tools/indicators to use when and how.

The KISS principle works well. The fewer indicators you can use to get reliable results the better. Three or four indicators taken together can be adequate.

In the following article, the top 7 technical tools - from the hundreds that have been developed over the years - have been listed. Try them out:

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